The rapidly evolving landscape of artificial intelligence (AI) is poised to impact corporate credit markets significantly, according to UBS analyst Matthew Mish. In a recent analysis, Mish highlighted the potential for tens of billions of dollars in corporate loans to default within the next year, particularly among software and data services firms, many of which are backed by private equity.
Mish noted that the introduction of advanced AI models from companies like Anthropic and OpenAI has accelerated expectations surrounding AI disruption. This has prompted UBS to revise its credit market forecasts, as many investors had underestimated the speed of this transformation. “The market has been slow to react because they didn’t think it was going to happen this fast,” Mish commented.
Concerns over AI’s disruptive capabilities have shifted investor sentiment, moving from a view of AI as a general growth factor for tech companies to a more competitive landscape where a few players dominate. This change has led to significant stock declines across various sectors, including finance, real estate, and trucking.
The UBS forecast anticipates that borrowers of leveraged loans will experience new defaults ranging from $75 billion to $120 billion by year-end, driven by a potential rise in default rates of 2.5% to 4% over the next few years. Mish pointed out a more severe scenario could see defaults double these estimates, precipitating a credit crunch in loan markets and forcing a broad repricing of leveraged credit.
This risk stems from various factors, including the pace of AI adoption by corporations and improvements in AI technologies. Mish categorized companies into three groups based on their potential resilience against AI disruption: foundational AI model creators, investment-grade software firms, and heavily indebted private equity-backed companies. He expressed skepticism about the long-term viability of firms in the third group amid these rapid changes.
Why this story matters: The implications of AI disruption may shape corporate credit markets and investment strategies.
Key takeaway: Investor sentiment is shifting toward viewing AI as a competitive threat, with potential for significant defaults in leveraged loans.
Opposing viewpoint: Some may argue that established companies with strong balance sheets can effectively leverage AI to maintain their market position against emerging competitors.
